The macro image has improved for the business with a host of positives; upgraded to “Buy” with an unchanged TP of `820
We are upgrading JSW Steel (JSTL) from ‘BUY’ to ‘HOLD’ with an unchanged TP of `820 because: (i) the consolidation of Bhushan Power & Steel (BPSL) is likely to be accretive; (ii) the volume of the Dolvi expansion (5 mtpa) will likely be at a 15-20% lower operating cost; and (iii) it is the only company to benefit from a capacity increase benefit until the 24th financial year.
Going forward, we see three main bright spots: (i) a sales volume rate of 5mt/quarter; (ii) scaling up value-added capability; and (iii) the recovery of subsidiaries abroad. That said, the reduction in the scope of debt reduction due to the investment commitment throughout the 24th financial year remains the main risk. We maintain the TP at Rs 820 at an unchanged Ebitda of 5.5x rising to FY23e, implying 20% upside potential.
JSTL’s performance in Q2FY22 met estimates. Key points: (i) Standalone EBITDA/t at Rs 22,944 (down 13% qoq) due to higher cost of coking coal. (ii) Mixed standalone realization increased by Rs 2,000/t qoq due to past export prices and favorable contracts. (iii) Overseas subsidiaries generated Ebitda of Rs 4.9 billion (Q1FY22: Rs 2.9 billion). Going forward, we expect: (i) sales volume in India to increase to ~5 million tonnes per quarter thanks to the ramp-up of Dolvi and the consolidation of BPSL’s operations; (ii) higher cost of coking coal of $95-100/t likely to impact margins; and (iii) cost reduction initiatives and increased value-added capability that could lead to sustainable improvement in profitability.
Beyond the short-term impact of the high cost of coking coal
In our view, JSTL presents a compelling long-term opportunity because: (i) consolidation of BPSL would add value (`35/share); (ii) it is the only company to increase its capacity until the 24th financial year; and (iii) the ongoing brownfield expansion at Vijaynagar (5 mtpa) and the potential to further expand BSPL’s capacity to 3.5 mtpa present additional volume growth opportunities. However, we do not expect a significant debt reduction at JSTL, unlike its peers, as high capital expenditures are expected to continue through FY24e.
Outlook: The outlook is improving – We estimate that the consolidation of BPSL has generated incremental value of Rs 35 per share and the higher volume in FY24e is mitigating the impact of higher coal prices to short term coke. We move on to “Buy”.